September 10, 2022
There is a large recession lobby in Washington these days that seems to view a recession as a positive good for the economy and society. The basic story is that we have seen a big jump in inflation associated with the pandemic and the war in Ukraine. They argue that a recession will be needed to bring inflation back down to acceptable levels.
The logic is that the higher unemployment associated with a recession will force workers to take pay cuts. This will reduce inflationary pressures in the economy.
I, and others, have pointed out the enormous human costs associated with a recession. Unemployment is traumatic for everyone, but we know that the people who are most likely to lose their jobs in a recession are those who are most disadvantaged in the labor market, such as Blacks, Hispanics, people with less education, and people with a criminal record.
And, contrary to what you often hear in the media, the unemployed are not a relatively small group. While 5.0 percent or 6.0 percent unemployment might seem like a relatively small share of the population, most unemployment spells are relatively short (thankfully), as people move in and out of unemployment. But this means that two to three times this number of people may experience unemployment over the course of the year.
Furthermore, the reduced bargaining power, which is the whole point of this exercise, is experienced by tens of millions of workers stretching up past the median worker. In our book, Getting Back to Full Employment, Jared Bernstein and I showed that the only times when the median worker saw sustained real wage growth in the years since 1980 were when we had very low rates of unemployment.
It seems more than a bit bizarre that we have all these private and public efforts intended to reduce inequality and overcome the effects of centuries of discrimination, and then we have a government agency—the Federal Reserve Board—acting to deliberately increase inequality. This doesn’t mean that we shouldn’t take the concerns with inflation seriously, just that we should be very reluctant to go the route of pushing unemployment up as the main tool to reduce it.
Many of us have argued that a big jump in unemployment will not be needed to restrain inflation. The pandemic and war-related factors that led to the jump in inflation are gradually being reversed, as seen most clearly with the plunge in gas prices the last three months.
With monthly inflation coming in at zero in July, and likely to do so again for August, the Fed has the luxury of adopting a wait and see approach before going ahead with more big rate hikes. Expectations of inflation are actually falling, so there is little immediate basis for fear about a self-fulfilling burst of higher wage and price increases leading to higher inflation.
But there is another factor that needs to be considered when assessing the urgency of rate hikes and unemployment compared to the benefits of the wait and see approach: the likely Republican takeover of at least one house of Congress this fall. This is not a partisan question about whether the Fed should be acting to favor Republicans or Democrats (its actions at this point will have little impact on the pre-election economy), rather it is a recognition of how Republicans behave when there is a Democrat in the White House.
While political science on the whole probably has a worse track record than economists in terms of explaining its object of study, one item on which there is a high degree of certainty is that a weak economy is bad news for the incumbent president. The worse the economy looks in 2024, the poorer will be Joe Biden’s chances of getting reelected.
Congressional Republicans certainly know this. They did everything they could to sabotage the economy after they gained control of the Congress in 2010. They insisted on large budget cuts, which slowed growth and kept the unemployment rate high.
Their story was the old joke about the deficit. When a Democrat is in the White House, the Republicans are the biggest worriers about deficits and debt anywhere. We saw that under Clinton in the 1990s and President Obama in the last decade. However, deficits don’t matter when they want big tax cuts with Republicans like Reagan, Bush II, or Trump in the White House.
This history means that if the Republicans take over the House this fall, we can be absolutely certain that they will block any efforts to stimulate the economy to boost it out of recession. In fact, they will most likely be demanding budget cuts to make the recession worse. And, given recent history, they will be threatening government shutdowns and debt defaults to get these cuts.
The Republicans are a party that does not give a damn about the well-being of the country; after all, their rich backers will be doing fine in a recession. They want political power. Mitch McConnell put this as clearly as possible after Obama was elected in 2008. He said that it was his job to make sure that Obama was a one-term president. (McConnell obviously failed on that one.)
This political picture has to be taken into account when considering the relative risks of the Federal Reserve Board’s interest rate policy. The inflation hawks do have a point, there is a risk (albeit a small one in my view) that we will see the sort of wage-price spiral we saw in the 1970s, with inflation rates getting ever higher, or at least remaining at levels that few of us would consider acceptable.
However, there is also the risk that Republican control of Congress will make what would have been a relatively short and mild recession into a long and severe recession. If there is one lesson we have learned well following the Great Recession, it is much easier for the Fed to use monetary policy to slow the economy than to boost it out of a recession.
The Fed certainly has the ability to put the economy into a recession. If a Republican Congress wants to keep us in recession, there will not be much that the Fed can do to counter its actions.